ALOT - Atai Capital - AstroNova: An Actual Monopoly With Visibility To Further Upside

2023-04-26 05:45:00 ET

Summary

• AstroNova is the Atai's largest and highest conviction position as of writing.
• After acquiring Honeywell's printer business in 2018, ALOT has been left with an actual monopoly.
• As of writing AstroNova is trading at ~6.5x our CY-2024 estimates.
• Applying what I consider to be a more than reasonable 10x multiple on this business gets me to a $24/share with visibility to further upside.

The following segment was excerpted from this fund letter.

AstroNova Inc. ( ALOT )

AstroNova is the firm's largest and highest conviction position as of writing. The business has two segments; the first is Test & Measurement ("T&M"), which designs and manufactures airplane cockpit printers; this segment also includes a smaller line of hardware systems used to acquire, record, process, and analyze data for a wide range of industries. The second is Product.

Identification ("PID") which sells a wide assortment of label printers and the related consumables such as labels and ink.

The crux of our investment in AstroNova revolves around airplane production picking up over the coming years from its current levels. Boeing in 2018 (before the 737-MAX groundings) delivered 806 commercial planes versus just 480 in 2022, and Airbus in 2019 delivered 863 commercial planes versus just 661 in 2022. Going off these numbers means we're still 32% below pre-covid commercial airplane production. I want to make it clear that there is not a demand issue keeping these production numbers below pre-covid levels, but rather a well-publicized supply chain, labor, and manufacturing bottleneck. Boeing is expected to deliver 800 commercial planes in 2025, Airbus is guiding to 1,000 by mid-decade, and Air India just placed orders for 470 aircraft - This order marks Boeing's second-largest of all time by quantity.

AstroNova's cockpit printers come standard on all Airbus A320s, and for Boeing 737s the airlines purchase the printers directly from AstroNova. Their printers are also available on other Airbus and Boeing families of planes, but the 737 and A320 lines make up the majority of commercial airplane deliveries and, as a result, AstroNova's cockpit printer sales. It's important to note that there are no other cockpit printer manufacturers that I am aware of, and after acquiring Honeywell's printer business in 2018, AstroNova has been left with an actual monopoly . One which is further protected by a strict and expensive FAA (Federal Aviation Administration) approval process just to make it on the planes. The market is also niche enough, and its TAM is small enough that large competitors such as HEICO that specialize in reverse engineering aerospace components are unlikely to target AstroNova and its printers.

The question you're likely asking right now is, "Can't that just be replaced with an iPad or computer, and why hasn't it?" The short answer is that they could, but the long answer is that it's unlikely. Let me explain why, pilots like using these printers in most cases, and some even vehemently defend them and don't want them replaced since they can make their work less cumbersome. These printers print off things like weather reports, flight paths, air traffic control data, and other information from ACARS (Aircraft Communication Addressing and Reporting System). Some pilots find it easier to print something off they can write on and hand it to their copilot rather than going through ten different menus to get to what they want. Some airlines even send things like flight attendant reassignments through them, making the printers a potentially vital piece of equipment for the airline's operations. Furthermore, the FAA and airlines move incredibly slow when it comes to anything technology; just ask Southwest about their recent debacle in December, which was partially due to their scheduling tech not changing much since the 1990s, according to insiders. Finally, these printers also add a valuable form of redundancy in case of technical failures and allow for the physical documentation of flight records.

I had the opportunity to speak with two pilots a few months back about the printers, and there are also rather lengthy forums online where a past investor had asked pilots questions on the matter, and in both instances, positive things were said about the printers. The printers themselves cost roughly $ 15k-$30k, which is a rounding error in relation to the total $100M+ cost of a commercial plane. This is probably well worth the redundancy it provides, and it's likely not worth saving the 0.02% on new plane purchases while risking troublesome operational headaches that would likely come without having these printers.

In the most recent quarter, the T&M segment beat my expectations, and run-rate EBITDA is now near FY19 levels exiting the quarter. They won several design-ins for defense programs on the data acquisition side of things, and margins continue to progress nicely. I'm expecting continued growth from this segment as commercial airplane delivery ramps up over the coming years.

PID (label printers) is not some amazing business but should prove to be a fairly recession resistant ~GDP grower since most of their customers sell consumables such as food, beverages, chemicals, etc. Relatively low customer concentration and the recent stellar acquisition of AstroMachine should prove to be an added boon for PID due to synergies and real cross-selling opportunities. However, as of the recent quarter, the business is once again facing margin pressure primarily stemming from a supplier issue that has led to a substantial portion of printers needing to be fixed. This is the second time the issue has arisen because the original fix they had started to implement a few months back didn't work. Management expects this issue to be worked through by the end of CY-Q3.

As of writing AstroNova is trading at ~6.5x our CY-2024 estimates. It should be noted that I consider my assumptions to be both conservative and very beatable. Taking a look at other aerospace parts companies, they trade around 15x EBITDA, and this is after some recent multiple compression in the space. While it's true AstroNova has a less attractive non-monopolistic business attached (although we don't think it's bad by any means), they also benefit from a very low maintenance capex of around $3M or so. Applying what I consider to be a more than reasonable 10x multiple on this business gets me to a $24/share with visibility to further upside.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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